Operational Risk and its impact on the Fund &

Investment Management Industry

An Insurance Perspective

Angelos Deftereos
Aon Limited
16th April 2003

Aon Limited is a member of the General Insurance Standards Council

 Contents
 1. What may be the extent of its impact?

 2. What is Operational Risk?

 3. How can you influence Capital Charge?

 4. How may insurance assist?

 5. Summary

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What may be the extent of it’s impact?
 Study of impact on European Asset Managers
 Currently 13 week expenditure
 Impact - 20% increase for large asset managers
-
60% increase for medium asset
managers
- ?% increase for small asset managers
Source: Bank Reputation and Asset Management Industry:
Professor Colin Meyer 2001

Aon Limited is a member of the General Insurance Standards Council

 What is Operational Risk?

“The risk of loss resulting from inadequate or failed internal

processes, people and systems or from external events.”

Source: Basel II Consultative Paper

January 2001

Revised Working Paper

September 2002

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What is the Regulatory Timeframe?
Jan 2001 Second Consultative Package

End May 2001 Deadline for Comments

September 2001 Issue of Working Paper on Operational Risk

End October 2001 Deadline for Responses to this paper

4th Quarter 2002 Consultative Paper Three Issued

2003 Publication on the New Accord

2006 Implementation of the New Accord

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How can you influence the Capital Charge?

“Intention is to make minimum

capital requirements of Banks
more risk sensitive.”

Basel II Consultative Paper

January 2001

Aon Limited is a member of the General Insurance Standards Council

How can you influence the Capital Charge?
Reduced Capital
Market Discipline Requirement
Pillar Two
Pillar Tw o
Market Discipline
Supervisory
Review Process
Supervisory
Pillar One Pillar One
Review Process

Minimum Capital Minimum Capital

Requirement Requirement

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 5 Steps to a Risk Management Framework

Step 1  Setting framework for implementation - Overall Operational Risk

Strategy
Identification & Risk Mapping  Definition of loss
 Set-up & implementation of data capturing mechanisms
 Assist in mapping losses into agreed risk categories
5 Steps to a Risk Management Framework

Application of modelling techniques

Step 2 
 Enhance external benchmarking, modelling & forecasting using
Quantification
Aon’s OpBase database
 5 Steps to a Risk Management Framework

Identify risk appetite

Step 3 

benchmark peer & firms own actuarial trends

Risk profile analyse geographical factors
overlay strategic vision

aggregation issues
market & credit risk diversification benefits
 5 Steps to a Risk Management Framework

Internal solutions
Step 4 
captive analysis / risk financing analysis / risk retention
Risk solutions  Insurance
Mapping availability of insurance to risks identified
Advise & agree appropriate retention level & limit
Design insurance programme
Provide a range of alternatives in conjunction with

business goals
 Capital markets
 Hybrids
 5 Steps to a Risk Management Framework

Assist in ensuring operational risk management strategy is

Step 5 

implemented & maintained

Monitoring & updating  Updates on operational risk market developments
 How may insurance assist?
Insurance Road Map

Other Liabilit y
Non-Financial
Typical

General &
ECCP

All Risks
Property
D&O
BBB

PI

OPERATIONAL RISK PROTECTION

0% 100%
Hedge

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 0%
Typical Advanced

BBB BBB

ECCP ECCP

PI PI
Insurance Road Map

D&O D&O

EPL

Unauthorised
Trading

Organisational

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Liabilit y
How may insurance assist?

OPERATIONAL RISK PROTECTION

Non-Financial Non-Financial
Property Property
All Risks All Risks

General & General &

Other Liabilit y Other Liabilit y
100% Hedge
 How may insurance assist?
Insurance Road Map

Physical
Leading

Relationship People External Technology

Edge

Assets
Risk Risks Fraud Risk
All Risks
Advanced

Organisational
Unauthorised

Non-Financial

General &
ECCP

All Ris ks
Property

Liabilit y
Trading

Liabilit y
D&O
BBB

EPL

Other
PI
Typical

Other Liabilit y
ECCP

D&O

General &
BBB

Property
All Ris ks
PI

OPERATIONAL RISK PROTECTION

0% 100%
Hedge

Aon Limited is a member of the General Insurance Standards Council

How may insurance assist?
Insurance Road Map

C a p i ta l
Fu tu r e

Physical
Relationship People External Technology
Assets
Risk Risks Fraud Risk
All Risks
Ty p i c a l A d v an c e d L e ad in g

Physical
Ed ge

Relat ionshi p Peopl e External Technol ogy

Assets
Risk Risks Fraud Risk
All Risks

O r g an i s a ti o n al

N o n - F in a n c i al
U n a u th o r i se d

G en e r al &
A l l R i s ks
ECCP

P ro p e r ty

L i ab i l it y
T r ad i n g

L i ab i l it y
D&O
BBB

O th e r
EPL
PI

O th e r L i ab i l it y
ECCP

G en e r al &
A l l R i s ks
D&O

P ro p e r ty
BBB

PI

OPERATIONAL RISK PROTECTION 100%

0% Hedge

Aon Limited is a member of the General Insurance Standards Council

How may insurance assist?

Expected Severe Catastrophic

Retained Unexpected Unexpected

Severity of Loss

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How may insurance assist? Catastrophic
Expected Severe CatastrophicUnexpected
Retained Unexpected Unexpected
Frequency

Insurance

Severity of Loss

Aon Limited is a member of the General Insurance Standards Council

 Summary
 Fund Management industry will be impacted by
the proposed new capital charges

 ‘Fat tail’ risks expensive to retain on balance

sheet, risk transfer more economic
 Insurance market working to obtain regulatory
relief for its products
 Insurance will form a more significant part of
overall operational risk management strategy for
Fund and Investment Management Industry

Aon Limited is a member of the General Insurance Standards Council

 Angelos Deftereos
Aon Professional Risks
Telephone: 0207 668 9750
email: angelos.deftereos@aon.co.uk

Aon Limited is a member of the General Insurance Standards Council